Friday, March 9, 2012

Income Inequality Growth In The US Is A Mirage

Spending per person by income quintile shows how individuals are doing over time both in absolute terms and relative to those in other income groups. These data can be calculated from the government's Consumer Expenditure Survey. An examination of these data from 1985 through 2010 shows that inequality has declined rather than increased.

The average annual spending for a household in the lowest quintile in 2010 was $12,325 per person. In contrast, the average spending for a household in the top quintile was $29,022 per person.

On a per-person basis, Labor Department data show that in 2010, households in the top fifth of the income distribution spent 2.4 times the amount spent by the bottom quintile. That was about the same as 25 years ago. There is no increase in inequality. In addition, the overall level of inequality is remarkably small. A person moving from the bottom quintile to the top quintile can expect to increase spending by only 140 percent.

But compared with 1985, the big winners are the lowest-income group, whose expenditures per capital increased by 6.5 percent in constant dollars. In contrast, spending per person in the top income quintile increased by 1.5 percent. This shows that even though the income spread from top to bottom might be larger, those at the bottom are doing better than they did 25 years ago because they have greater spending power, after adjusting for inflation. This is important for the bottom quintile-economically, socially, psychologically.

Growth in inequality in America is illusory, a mirage. Economic studies and commentators that find increased inequality are celebrated, those that find none are ignored. Cursory reviews reveal no increase in real inequality, merely changes in demographic patterns such as increases in single-head-of-household families or an aging population.

Much "inequality" in the United States is a problem in search of reality, caused by writers who know a certain storyline will sell to an audience anxiously looking for additional reasons to have the government inject itself even more into the lives of ordinary Americans.